Final Results

RNS Number : 6813A

Instem plc

28 March 2017

 

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

Instem plc

("Instem", the "Company" or the "Group")

Unaudited Full Year Results

Instem (AIM: INS.L), a leading provider of IT solutions to the global early development healthcare market, announces its unaudited full year results for the year ended 31 December 2016.

Financial Highlights:

·     Revenues increased 12% to £18.3m (2015: £16.3m)

o  Recurring revenues increased 21% to £12.1m (2015: £10.0m)

o  Software as a Service (SaaS) revenues increased 38% to £2.9m (2015: £2.1m)

·     EBITDA* of £1.3m (2015: £2.5m)

·     Adjusted** profit before tax of £0.7m (2015: £1.7m)

·     Reported profit before tax of £0.02m (2015: loss before tax of £0.4m)

·     Basic earnings per share of 6.9p (2015: loss of 3.5p)

·     Adjusted** fully diluted earnings per share of 11.2p (2015: 12.9p)

·     Net cash balance as at 31 December 2016 of £4.2m (2015: £2.2m)

*Earnings before interest, tax, depreciation, amortisation and non-recurring costs.

**After adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance income/(costs), non-recurring items and amortisation of intangibles on acquisitions. Profit is adjusted in this way to provide a clearer measure of underlying operating performance.

Operational Highlights:

·     Oversubscribed placing to raise £5.0m (gross) in February 2016 to fund acquisitive growth:

o  Acquisition in May 2016 of Samarind Limited, a Regulatory Information Management solutions provider, for a maximum consideration of £2.5m

o  Acquisition in Sept 2016 of Notocord, a software provider in pre-clinical studies, for a maximum consideration of €4.2m (£3.6m)

·     Disappointing performance from Instem Clinical is being addressed through decisive management actions following strategic reappraisal

·     Strong trading across all other business areas:

o  Secured the majority of SEND ("Standard for Exchange of Non-clinical Data") related technology and outsourced services contracts placed in the market

o  Successfully established KnowledgeScan Target Safety Assessment service, delivering 14 assignments, with repeat business from every client

o  High levels of Provantis® contract renewals, including a long-term relationship with Charles River Laboratories, by far the largest pre-clinical CRO (contract research organisation)

o  Record revenue and profit contribution from Perceptive Instruments, our genetic toxicology product suite

·     Investment in the Sales and Operational teams and infrastructure to fund on-going growth

 

Phil Reason, CEO of Instem plc, commented:

"With the exception of the disappointing performance of Instem Clinical, business in 2016 was strong, helped by a buoyant pre-clinical market, the target for the majority of our products and services.  Revenues grew both organically and through the acquisitions of Samarind and Notocord.  Recurring revenue and SaaS revenue growth of 21% and 38%, respectively, were particularly pleasing.

"A more conservative revenue outlook for Instem Clinical in 2017 is expected to be more than offset by the growing momentum of our KnowledgeScan big data analytics and insights service, introduced in 2016, and the full year contributions from the Samarind and Notocord acquisitions.

"The FDA mandate of SEND in December 2016 fuelled market demand for our software and technology enabled out-sourced services and we anticipate strong revenue growth in line with expectations, however  we will continue to invest in additional staff and facilities in this area during 2017 to ensure we maximise market share and retain our substantial market leadership as the FDA regulations drive further market growth.  While near term profit will be significantly reduced by this and other investment across the Group, we are putting in place a platform for further growth in the longer term."

For further information, please contact:
Instem plc	[phone]
Phil Reason, Chief Executive Officer
Nigel Goldsmith, Chief Financial Officer
N+1 Singer (Nominated Adviser & Broker)	[phone]
Richard Lindley
Nick Owen
Walbrook Financial PR	[phone]
Paul Cornelius
Helen Cresswell
Sam Allen
Paul Whittington

About Instem

www.instem.comInstem is a leading supplier of IT applications and services to the early development healthcare market delivering compelling solutions for data collection, analysis and regulatory submissions management. Instem solutions are in use by customers worldwide, meeting the rapidly expanding needs of life science and healthcare organisations for data-driven decision making leading to safer, more effective products.

Instem's portfolio of software solutions increases client productivity by automating study-related processes while offering the unique ability to generate new knowledge through the extraction and harmonisation of actionable scientific information. Instem supports over 500 clients through offices in the United States, United Kingdom, France, Japan, China and India. To learn more about Instem solutions and its mission, please visit www.instem.com

 

Chairman's Statement

The period under review was undoubtedly a frustrating year for the Group, due wholly to the disappointing performance of Instem Clinical. Importantly, we successfully achieved a significant equity fundraise at the beginning of the year and subsequently completed two strategic acquisitions. We also managed strong revenue growth across the majority of our businesses and significantly strengthened our senior management team. Nevertheless, the poor performance of our Clinical business ultimately resulted in trading for the Group, disappointingly, coming in below our expectations for the year.

Notwithstanding the above, we have continued to invest in our business to both increase the depth of management expertise and enhance the various software product offerings across the Group. In particular, the appointment of MaryBeth Thompson as Chief Operating Officer, who brings more than 18 years of relevant experience to the role, is strategically important to the Group as it will enable the rest of the senior management team to increase their focus on delivering further organic growth and continuing our strategic acquisition programme.

I am pleased to report that the recent acquisitions of Samarind and Notocord are performing in line with expectations and are on track to be fully integrated in 2017 and we are now seeking to consolidate the full cross and up selling opportunities for both businesses as part of the larger group.

Importantly, our Preclinical and Regulatory Solutions businesses maintained their pre-eminent industry positions by continuing to win the majority of business placed globally in their markets. In particular, our submit™, Standard for the Exchange of Non-clinical Data ("SEND") technology suite has already demonstrated market dominance, winning the majority of contracts placed during the period. The evolution of our SEND value proposition continued during the year with the transition from a pure software licensing model to a combined offering with the addition of technology-enabled out-sourced services assignments. We secured over 50 SEND-related contracts in 2016.  In order to capitalise on the opportunities to provide services, as well as software, we are investing in additional staff and facilities, further details of which are included in the Chief Executive's Statement.

Furthermore, we introduced a new bio-informatics platform, KnowledgeScan, which achieved significant market recognition in its first application area of Target Safety Assessment ("TSA").  In the second half of the year we delivered several TSA projects with high levels of customer repeat business.

During the year, senior management time and resources were diverted into addressing the challenges with the Instem Clinical business and this is continuing. Whilst some challenges still remain, we have reappraised this business and believe that with some additional investment under the newly appointed Instem Clinical management team it can become a long-term cornerstone business for the Group.

The strategic opportunities for 2017 and beyond remain encouraging; particularly as the period will see full-year contributions from the recent Notocord and Samarind acquisitions. The period will continue to require us to make further investment to support the continued strong performances from our business units, in particular the opportunity in SEND, although this is expected to pay back relatively quickly. 

As Chairman, it has always been my passion to invest in world leading global products. Today the Company has, for our markets, an unrivalled portfolio of such products.

Finally, I would like to take this opportunity once again to thank all of our staff, customers and partners for their ongoing support.

David Gare, Non-Executive Chairman

28 March 2017

 

Chief Executive's Statement

Overview

The past year was an extremely busy time for Instem, with the successful oversubscribed placing at the beginning of the year and the completion of two acquisitions, which are integrating well.

With the exception of Instem Clinical, trading was robust throughout the year, helped by a buoyant preclinical market. Unfortunately, in what turned out to be a very challenging early phase clinical market, certain significant contracts at Instem Clinical were delayed and the outperformance across the rest of the Group's operations was insufficient to compensate for this shortfall. We consequently downgraded expectations for the full year towards the end of the period.

Highlights for the period included further market penetration for existing product suites and services and a continued high percentage of client retention. This was supported by cross-selling of products across our extended client base, particularly for our genetic toxicology solutions in major accounts and for all solutions in the Asia-Pacific regions. Through investment in product development, we have introduced new and chargeable solutions and expanded our service offering, leveraging our leading technology solutions. Taking further market share in the now FDA mandated SEND market has been a particular management focus, while also concentrating on improving our substantial recurring revenues, with a 21% increase year-on-year.

A significant positive milestone achieved during the period was the successful launch of "Instem University", an online learning platform for the Group's global customer base. The Instem University is a sophisticated, easy to use, intuitive web-based solution that is available on demand whenever a client needs it. Instem's entire approach for the initiative is based upon the single objective of making it easier for clients to use all of Instem's software so that end users can better perform their jobs. The introduction of Instem University and its dedicated Academies provides a highly cost effective and scalable solution enabling many clients to quickly and concurrently deploy major Instem product upgrades.  Having clients on the latest product versions maximises the potential for add-on sales of new modules and reduces internal support costs.

In order to support the growth of the Group, primarily related to SEND, KnowledgeScan and Instem University, we are intending to invest c.£1m in 2017, of which approximately £0.4m relates to third party cost of sales. This investment will include the funding of larger premises in Pune, India and further expansion of our software development, market facing and out-sourced services staff.

Instem Preclinical - Provantis, Notocord-HEM, Comet, AMES & Cyto Study Manager

Provantis, the Group's primary preclinical software suite, experienced high renewal rates during the period with new clients added in-line with management expectations.

The largest of these renewals was with Charles River Laboratories ('CRL'), post their acquisition of WIL Research ('WIL'), both significant Instem clients. The new agreement, which was announced in August 2016, included the continuation of all current licences, an extended support and maintenance contract running through to 31^st December 2022 and the integration of two sizable Provantis implementation projects. The revised agreement resulted in moderately higher revenue in 2016 than under the previous separate agreements with WIL and CRL, and we believe there are further opportunities to continue to grow this key relationship over the coming years.

One of the key Preclinical milestones for the year was the successful launch of the "Provantis 10 Software suite", a fully integrated Windows-based system for organisations engaged in non-clinical evaluation studies, which went live in the second half of 2016. Initial feedback has been universally positive and we intend to further roll-out Provantis 10 across our customers during the coming year.

As a consequence of the Perceptive Instruments ("Perceptive") acquisition, Instem is one of the leading specialist video imaging system providers in the preclinical market and enjoyed a particularly strong year with revenue up approximately 15% over the prior year. Cyto Study Manager and AMES Study Manager enjoyed particularly strong trading periods. Cyto Study Manager, which integrates data acquisition, auditing, reporting and study management for several genetic toxicology assays into a single system, benefitted from adding support for Chromosome Aberration assays. Genotoxicity studies are mandatory for all pharmaceuticals, medical devices, agrochemicals and industrial chemicals with the AMES assay the most widely used regulatory test. Instem's Ames Study Manager can be found in laboratories across the globe and has rapidly established itself with an excellent reputation for increasing productivity while improving compliance with GLP regulations and reporting requirements.

Notocord, acquired by Instem in September 2016, continues to integrate well into the Group. Notocord is headquartered in Paris, France. The company provides software solutions for telemetry data acquisition and analysis and is a highly respected name in the life sciences software industry. Notocord has sold more than 1,500 licences around the world to major pharmaceutical companies, contract research laboratories, hospitals and academic research centres. Customers include Sanofi, Merck & Co and Pfizer.   Whilst it is still too early to report on potential cross selling and upselling opportunities across the Group, there have already been high levels of interaction with both customers and potential new sales channel partners. This, coupled with a well-attended user meeting in Paris, provides us with confidence that the acquisition will perform at least in-line with management expectations in the current year.

We are pleased to report that the order expanding the utilisation of Provantis at the US National Institute of Environmental Health Sciences ("NIEHS"), delayed from 2016, has recently been received and the appropriate accounting treatment for revenue and profit recognition purposes is currently being assessed. The delayed AMES and Cyto Study Manager order has also been received.  

Instem Clinical - ALPHADAS™

The early stage clinical market was undoubtedly the most challenging aspect of the year for Instem with little new business being procured during the period as much of the existing pipeline of new business was delayed.

Whilst the deterioration in trading levels was initially identified in the first half of the year and flagged in the Interim Results, it was felt far more acutely during the second half.  Following a Board review of the significant under performance of the Clinical business, the sale agreement with the former Logos Technologies shareholders was revised, resulting in a £700k reduction in the deferred consideration for the Logos acquisition.  The two major Logos shareholders, who were the two senior managers for Instem Clinical, also left the company.  Instem Clinical now has new management in place working to a revised, more conservative business plan.

Whilst the business underperformed in the period, having undertaken a strategic reappraisal of Instem Clinical, we still strongly believe that the early stage clinical market represents a significant and attractive opportunity for the Group, including the potential for the cross selling of other products and services.  However, we also recognise that it will take a period of time for the new management team to fully address certain issues and further staff investment of circa £0.25 million is being made into strengthening the technical and development capability in order to further enhance the ALPHADAS offering.  Encouragingly, whilst still early in the year, we are seeing revenue growth compared to the prior period.

 

Instem Scientific

Instem Scientific delivered a record 14 KnowledgeScan Target Safety Assessment assignments during the period and is on target to deliver a further six for mid-sized pharmaceutical companies in the first few months of 2017. An important key performance indicator during the period was that all customers in 2016 have already placed repeat KnowledgeScan orders, which highlights the high value proposition this business offers.

Whilst activity has been at record levels, the business has also been focussing on improving the workflow of discrete assignments to reduce delivery timelines, add extra capacity and expand operating margins. There is a growing pipeline of new business opportunities for 2017.

Samarind Ltd

Samarind, acquired in May 2016, provides Regulatory Information Management ("RIM") software solutions across the life sciences sector, through its product suite "Samarind RMS". Its solutions significantly enhance the quality of regulatory information and help to achieve and maintain compliance for pharmaceutical, biotech and medical device products.

Samarind RMS delivers the security, flexibility and ease of use that regulatory affairs teams need to achieve their regulatory and commercial requirements. Deployed on-site or accessed on-line, Samarind's solutions provide a smarter way to manage the acquisition and maintenance of product licences.

Instem can report that whilst it has been a slower year for revenue growth, the retention rate of existing clients has been high and we have released a new dashboard and analytics module to improve the user interface and strengthen customer relationships across the product suite. There has also been a strong focus on the new Identification and Description of Medicinal Product ("IDMP") Standards, making sure Instem's strategy is aligned with the expected regulatory dates and working with clients to plan for their IDMP implementations.  Instem's leadership in the xEVMPD standard that will be replaced remains a useful market differentiator as organisations consider their IDMP needs.

Electronic Regulatory Submissions (SEND) - submit™

The FDA's ("Food and Drug Administration") SEND ("Standard for Exchange of Nonclinical Data") initiative was ratified in December 2014 and mandated for an initial subset of study submissions in December 2016.  Consequently, its implementation is now a market imperative for the entire drug development industry.  A more comprehensive range of study submissions will be mandated by the FDA in December 2017, which has already started to influence purchases of Instem technology and services.

Instem has continued to secure the majority of the SEND-related product and service business placed globally during 2016, winning over 50 contracts for its software solutions, of which 30 were for technology-enabled out-sourced services. Customers range across all sizes of pharmaceutical and contract research organisations with the largest contract award from a top 10 global pharmaceutical company, which purchased Instem's entire submit™ solution suite. 

In the second half of 2016, Instem agreed an exclusive global distribution agreement for a third party product, SEND Explorer, which provides sophisticated visualisation and analytics for SEND data sets and nicely complements Instem's other SEND solutions.

Technology enabled out-sourced service volume increased during H2 2016 with 30 contracts secured during the year from companies that had not already equipped themselves with staff and technology to create and review SEND data sets internally.  This trend is expected to continue and increase, so we are intending to recruit approximately 15 further specialists in this area, based predominantly in our Pune, India office, complementing the highly experienced staff already in place in the UK and North America.

Market Overview

Citeline®, which claims to have the world's most comprehensive source of real-time R&D intelligence for the pharmaceutical industry, recently reported, in its Pharma R&D Annual Review 2017, that the global drug pipeline had increased by 8.4% in the past year with an additional 1,154 drugs added to the pipeline, the second highest rise over the last 10 years following the record rise in the prior year (1,418 were added in 2015-16).

As of January 2017, the total number of companies with one or more drugs in the regulatory stages of development has now risen to 4,003, an increase of 8.6% on the previous year. This is lower than the 2015-16 number but is still a "strikingly large growth rate".

The volume of activity in pharma R&D is at an all-time high with all the important parameters for Instem increasing strongly.

The greatest growth occurred at the preclinical stage with an extra 632 drugs joining the early drug phase, an increase of 9.2% on the previous year. While there were increases in the numbers of drugs at every clinical phase, Phase I saw the greatest rise this year with the drug count increasing by 11.2%.

Financial Review

Instem's revenue model consists of perpetual licence income with annual support contracts, professional services fees, SaaS subscriptions with annual support contracts and funded development initiatives. Total revenue for the year to 31 December 2016 increased by 12% to £18.3m (2015: £16.3m).  This increase includes revenues from our new acquisitions of £1.1m combined with organic growth in respect of the majority of our products, and the benefit of average exchange rates, which increase the underlying revenues. These are offset by costs of our overseas subsidiaries.

A key performance indicator of the Group is recurring revenue.  During the year the total recurring revenue, from support & maintenance contracts, SaaS based subscriptions and certain professional services increased 21% during the year to £12.1m (2015: £10.0m), representing 66% of total revenue (2015: 61%).  This includes recurring revenue generated from our 2016 acquisitions of £0.8m.

Earnings before interest, tax, depreciation and amortisation and non-recurring items for the year was £1.3m (2015: £2.5m).  This decrease reflected a disappointing performance from Instem Clinical.  The Group continued to invest in our sales and operations teams and infrastructure to capitalise on growth opportunities going forward.

Adjusted profit before tax (i.e. adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance costs, non-recurring items and amortisation of intangibles on acquisitions) was £0.7m (2015: £1.7m).  The unadjusted profit before tax for the year was £0.02m (2015: loss of £0.4m).

The non-recurring items in the year included the costs of professional fees in respect of the acquisitions of Samarind and Notocord together with the restructuring costs in respect of Instem Clinical.  These costs aggregated to £0.4m.  The non-recurring items also included income of £1.0m in respect of the amendment and change in the deferred consideration and deferred contingent consideration in respect of Clinical (£0.7m) and Samarind (£0.3m), respectively.

Development costs incurred during the year were £2.6m (2015: £1.9m), of which £0.8m (2015: £0.6m) was capitalised.  The Group claimed and received research and development tax credits during the year of £0.4m (2015: £0.2m)

Basic and fully diluted earnings per share calculated on an adjusted basis were 11.5p and 11.2p respectively (2015: 13.3p basic and 12.9p adjusted).

The Group continued to generate net cash from operating activities.  The Group had net cash reserves of £4.2m at 31 December 2016, compared with £2.2m as at 31 December 2015.  The increase is largely due to the cash proceeds from the share issue during the year which generated £4.8m (net of fees) less the initial consideration for both Samarind and Notocord of £3.3m.

The Group's legacy defined benefit pension scheme has remained closed to new members since 2000 and to future accrual since 2008. It experienced an increase in the funding deficit during the year calculated in accordance with the provisions of IAS19 that amounted to £1.0m (net of deferred tax) (2015: £0.3m) due to a reduction in bond yields following the EU Referendum.  This is a non-cash charge and was recognised in Other Comprehensive Income/(Expense). The overall deficit at the year-end stood at £4.7m (2015: £3.9m), represented by the fair value of assets of £9.7m (2015: £7.9m) and the present value of funded obligations of £14.4m (2015: £11.8m). As part of the scheme's triennial actuarial valuation as at 5 April 2014, the Group agreed in June 2015 a schedule of payments to the scheme designed to eliminate the funding deficit by November 2023.  The next triennial valuation will be calculated as at 5 April 2017.

Principal risks and uncertainties

The directors consider that the global pharmaceutical market is likely to continue to provide growth opportunities for the business. The combination of the high level of annual support renewals and low levels of customer attrition provides revenue visibility to underpin the Group strategy on product and market development.

The Group seeks to mitigate exposure to all forms of risk through a combination of regular performance review and a comprehensive insurance programme.

The global nature of the market means that the Group is exposed to currency risk as a consequence of a significant proportion of its revenue being earned in US Dollars, some of which is mitigated by operating costs incurred by its US operation.  The Group continually assesses the most appropriate approach to managing its currency exposure in line with the overall goal of achieving predictable earnings growth.

The Group's credit risk is primarily attributable to its trade receivables and the Group has policies in place to ensure that sales of products and services are made to customers with appropriate creditworthiness.

The Group manages liquidity risk through regular cash flow forecasting and monitoring of cash flows, management review and regular review of working capital and costs.  The Group regularly monitors its available headroom under its borrowing facilities.  At 31 December 2016, its £2.0m committed bank facility was undrawn (2015: £2.0m undrawn).

 

Summary and Outlook

With the exception of the disappointing performance of Instem Clinical, business in 2016 was strong, helped by a buoyant pre-clinical market, the target for the majority of our products and services.  Revenues grew both organically and through the acquisitions of Samarind and Notocord.  Recurring revenue and SaaS revenue growth of 21% and 38%, respectively, were particularly pleasing.

A more conservative revenue outlook for Instem Clinical in 2017 is expected to be more than offset by the growing momentum of our KnowledgeScan big data analytics and insights service, introduced in 2016, and the full year contributions from the Samarind and Notocord acquisitions.

The FDA mandate of SEND in December 2016 fuelled market demand for our software and technology enabled out-sourced services and we anticipate strong revenue growth in line with expectations, however  we will continue to invest in additional staff and facilities in this area during 2017 to ensure we maximise market share and retain our substantial market leadership as the FDA regulations drive further market growth.  While near term profit will be significantly reduced by this and other investment across the Group, we are putting in place a platform for further growth in the longer term.

Phil Reason

Chief Executive

28 March 2017

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2016

Continuing Operations	Note	Unaudited Year ended  31 December 2016 £000	Audited Year ended 31 December 2015 £000
REVENUE	2	18,319	16,321
Operating expenses		(16,843)	(13,553)
Share based payment		(223)	(263)
EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION, AMORTISATION  AND NON-RECURRING COSTS ('EBITDA')		1,253	2,505
Depreciation		(156)	(156)
Amortisation of intangibles arising on acquisition		(667)	(640)
Amortisation of internally generated intangibles		(380)	(376)
PROFIT BEFORE NON-RECURRING INCOME/(COSTS)		50	1,333
Non-recurring income/(costs)	4	619	(1,426)
PROFIT/(LOSS) FROM OPERATIONS		669	(93)
Finance income		-	4
Finance costs	5	(646)	(272)
PROFIT/(LOSS) BEFORE TAXATION		23	(361)
Taxation	3	1,035	(67)
PROFIT/(LOSS) FOR THE YEAR		1,058	(428)
OTHER COMPREHENSIVE (EXPENSE)/INCOME
Items that will not be reclassified to profit and loss account
Actuarial loss on retirement benefit obligations		(1,192)	(339)
Deferred tax on actuarial loss		215	61
		(977)	(278)
Items that may be reclassified to profit and loss account
Exchange differences on translating foreign operations		844	(24)
OTHER COMPREHENSIVE EXPENSE FOR THE YEAR		(133)	(302)
TOTAL COMPREHENSIVE INCOME/(EXPENSE) FOR THE YEAR		925	(730)
PROFIT/(LOSS) ATTRIBUTABLE TO OWNERS OF THE PARENT COMPANY		1,058	(428)
TOTAL COMPREHENSIVE INCOME/(EXPENSE) ATTRIBUTABLE TO  OWNERS OF THE PARENT COMPANY		925	(730)
Earnings/(Loss) per share from continuing operations
Basic	6	6.9p	(3.5)p
Diluted	6	6.8p	(3.5)p

 

Consolidated Statement of Financial Position

As at 31 December 2016

	Unaudited 31 December 2016		Audited 31 December  2015
ASSETS	£000	£000	£000	£000
NON-CURRENT ASSETS
Intangible assets	17,607		12,035
Property, plant and equipment	374		376
Deferred tax assets	947		663
TOTAL NON-CURRENT ASSETS		18,928		13,074
CURRENT ASSETS
Inventories	916		822
Trade and other receivables	6,899		4,745
Financial Asset	10		-
Cash and cash equivalents	4,189		2,183
TOTAL CURRENT ASSETS		12,014		7,750
TOTAL ASSETS		30,942		20,824
LIABILITIES
CURRENT LIABILITIES
Trade and other payables Deferred income	2,670 9,092		1,797 7,107
Current tax payable	429		541
Financial liabilities	979		385
TOTAL CURRENT LIABILITIES		13,170		9,830
NON-CURRENT LIABILITIES
Financial liabilities	242		448
Retirement benefit obligations	4,746		3,933
TOTAL NON-CURRENT LIABILITIES		4,988		4,381
TOTAL LIABILITIES		18,158		14,211
EQUITY
Share capital	1,577		1,304
Share premium	12,462		7,903
Merger reserve	1,432		1,241
Shares to be issued	864		641
Translation reserve	1,048		204
Retained earnings	(4,599)		(4,680)
TOTAL EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT		12,784		6,613
TOTAL EQUITY AND LIABILITIES		30,942		20,824

 

Consolidated Statement of Cashflows

For the year ended 31 December 2016

		Unaudited Year ended 31 December 2016		Audited Year ended 31 December 2015
		£000	£000	£000	£000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit/(loss) before taxation		23		(361)
Adjustments for:
Depreciation		156		156
Amortisation of intangibles		1,047		1,016
Loss on disposal of property, plant and equipment		2		-
Share based payments		223		263
Retirement benefit obligations		(517)		(427)
Finance income		-		(4)
Finance costs		646		272
(Decrease)/Increase in deferred contingent consideration		(1,017)		1,361
CASH FLOWS FROM OPERATIONS BEFORE MOVEMENTS IN WORKING CAPITAL			563		2,276
Movements in working capital:
Decrease/(increase) in inventories		12		(313)
Increase in trade and other receivables		(1,737)		(71)
Increase in trade and other payables and deferred income		1,809	84	493	109
CASH GENERATED FROM OPERATIONS			647		2,385
Finance costs		(379)		(86)
Income taxes		(141)	(520)	205	119
NET CASH GENERATED FROM OPERATING ACTIVITIES			127		2,504
CASH FLOWS FROM INVESTING ACTIVITIES
Finance income received		-		4
Purchase of intangible assets		(890)		(612)
Purchase of property, plant and equipment		(113)		(113)
Payment of deferred contingent consideration		-		(950)
Repayment of capital from finance leases		(33)		(8)
Purchase of subsidiary undertakings		(2,347)		-
NET CASH USED IN INVESTING ACTIVITIES			(3,383)		(1,679)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital (net of fees)		4,823		12
Loan note repaid		-		(303)
Finance lease interest		(8)		(4)
NET CASH GENERATED FROM/(USED IN) FINANCING ACTIVITIES			4,815		(295)
NET INCREASE IN CASH AND CASH EQUIVALENTS			1,559		530
Cash and cash equivalents at start of year			2,183		1,676
Effects of exchange rate changes on the balance of cash held in foreign currencies			447		(23)
CASH AND CASH EQUIVALENTS AT END OF YEAR			4,189		2,183

Consolidated Statement of Changes in Equity

Attributable to Owners of the Company

		Called up share capital		Share premium	Merger reserve	Shares to be issued	Translation reserve	Retained earnings	Total  equity
		£000		£000	£000	£000	£000	£000	£000
Balance as at  1 January 2015		1,221		7,892	(326)	378	228	(3,974)	5,419
Loss for the year		-		-	-	-	-	(428)	(428)
Other comprehensive expense for the year		-		-	-	-	(24)	(278)	(302)
Total comprehensive expense	-		-		-	-	(24)	(706)	(730)
Shares issued	83		11		1,567	-	-	-	1,661
Share based payment		-		-	-	263	-	-	263
Balance as at 31  December 2015		1,304		7,903	1,241	641	204	(4,680)	6,613
Profit for the year		-		-	-	-	-	1,058	1,058
Other comprehensive income/(expense) for the year		-		-	-	-	844	(977)	(133)
Total comprehensive Income	-		-		-	-	844	81	925
Shares issued		273		4,559	191	-	-	-	5,023
Share based payment		-		-	-	223	-	-	223
Balance as at 31 December 2016		1,577		12,462	1,432	864	1,048	(4,599)	12,784

 

Notes to the Financial Statements

1. Basis of Preparation

FINANCIAL INFORMATION

The preliminary financial information does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 but is derived from accounts for the years ended 31 December 2016 and 31 December 2015. The figures for the year ended 31 December 2015 were audited.  The preliminary financial information is prepared on the same basis as will be set out in the statutory accounts for the year ended 31 December 2016.  The figures for the year ended 31 December 2016 are unaudited.

The preliminary financial information was approved for issue by the Board of Directors on 28 March 2017.

The audit of the statutory accounts for the year ended 31 December 2016 is not yet complete.  These accounts will be finalised on the basis of the financial information presented by the directors in the preliminary announcement.  The statutory accounts for the year ended 31 December 2016 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.  Statutory accounts for the year ended 31 December 2015 have been filed with the Registrar of Companies.  The auditor's report on those 2015 accounts was unqualified and did not contain any statement under Section 498 (2) or (3) of the Companies Act 2006.

GENERAL INFORMATION

The principal activity of the Group is the provision of world class information solutions for Life Sciences research and development in the early phase drug development market. Instem plc is a company incorporated in England and Wales under the Companies Act 2006 and domiciled in the UK. The registered office is Diamond Way, Stone Business Park, Stone, Staffordshire, ST15 0SD, UK.

BASIS OF ACCOUNTING 

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), this announcement does not in itself contain sufficient information to comply with IFRSs.

The Group's accounting reference date is 31 December. 

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Certain year end asset and liability amounts reported in the financial information are based on management estimates and assumptions.  There is therefore a risk of significant changes to the carrying amounts of these assets and liabilities within the next financial year.  The estimates and assumptions are made on the basis of information and conditions that existed at the time of the valuation.

Fair value of assets acquired and calculation of contingent consideration

The amounts presented in the statement of financial position in respect of the fair values of assets acquired are estimated by the Group's management based on prior experience and information available at the time of the acquisition.  Key assumptions and judgements are required to both identify and measure the identifiable assets acquired.  It is the opinion of management, that in respect of both acquisitions, the identifiable intangible assets acquired relate to Intellectual Property and Customer Relationships.  The fair value of such assets represent the estimated future earnings discounted to their net present value. The assessment of these future earnings include estimates and judgements such as the use of an appropriate royalty rate in respect of the calculation and modelling of the intellectual property asset, the assessment of potential future earnings and the useful economic life of each identifiable asset acquired.

The contingent consideration provided in the financial statements is measured initially at its acquisition-date fair value.  The consideration in respect of both Samarind and Notocord include deferred contingent consideration, which is dependent on financial performance of the acquired businesses.  The estimation of fair values include management's best estimate to the outcome of such performance using detailed forecasts of the acquired business.

The directors have reviewed the sensitivity of the royalty rate assumption in the Samarind valuation of acquired intangible assets.  A 10% decrease in the assumed royalty rate would result in approximately a £136,000 increase in goodwill, £166,000 less acquired intangible assets and £30,000 less deferred tax liability arising on acquisition.  The subsequent impact of amortisation charge for the year ended 31 December 2016 would be a reduced charge of £16,000.

The directors have reviewed the sensitivity of the royalty rate assumption in the Notocord valuation of acquired intangible assets.  A 10% decrease in the assumed royalty rate would result in approximately a £168,000 increase in goodwill, £205,000 less acquired intangible assets and £37,000 less deferred tax liability arising on acquisition.  The subsequent impact of amortisation charge for the year ended 31 December 2016 would be a reduced charge of £9,000.

Recognition of deferred tax assets

The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted.  Where the temporary differences are related to losses, relevant tax law is considered to determine the availability of the losses to offset against the future taxable profits.  The amount recognised in the consolidated financial statements is derived from management's best estimation and judgement incorporating forecasts and all available information.  Recognition therefore involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised.

GOING CONCERN

Having made appropriate enquiries, the directors consider that the Group has adequate resources to enable it to continue in operation for the foreseeable future.  The Group has a significant proportion of recurring revenue from a well-established global customer base, supported by a largely fixed cost base.

The financial position of the Group, its cash flows and liquidity position are set out in the primary statements of this financial information.  Detailed projections have been made for the 12 months following the approval of the financial statements and sensitivity analysis undertaken.  This work gives the directors confidence as to the future trading performance.

Accordingly, the directors continue to adopt the going concern basis for the preparation of the financial statements.

 

2. Segmental Reporting

For management purposes, the Group is currently organised into one operating segment - Global Life Sciences.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

					2016 £000	2015 £000
	REVENUE BY PRODUCT TYPE
	Licence fees				4,162	4,612
	Annual support fees				8,890	7,383
	SaaS subscription fees				2,853	2,076
	Professional services				2,414	2,042
	Funded development initiatives				-	208
					18,319	16,321

				2016 £000	2015 £000
REVENUE BY GEOGRAPHICAL LOCATION
UK				3,329	2,004
Rest of Europe				3,232	3,592
USA and Canada				9,829	9,429
Rest of World				1,929	1,296
				18,319	16,321

			NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION
				2016 £000	2015 £000
INFORMATION BY GEOGRAPHICAL LOCATION
UK				17,750	12,331
USA and Canada				165	39
Rest of World				66	41
				17,981	12,411

MAJOR CUSTOMERS

There were no customers which represented more than 10% of the group revenue in 2016 (2015: Nil).

 

3. Income Taxes

Income taxes recognised in income statement				2016 £000			2015 £000
	Current tax:
	UK corporation tax on result for the year				103	98
	Foreign tax				400	411
	Foreign tax in respect of previous years				(45)	(302)
	Adjustments in respect of previous years				(312)	61
	Adjustments in respect of R&D tax credit				(350)	(173)
	Total current tax				(204)	95
	Deferred tax:
	Current year credit				(880)	(315)
	Adjustment in respect of previous years				(73)	179
	Effects of domestic rate changes on opening balances				46	52
	Retirement benefit obligation				76	56
	Total deferred tax				(831)	(28)
	Total income tax (income)/expense recognised in the current year				(1,035)	67

4. Non-recurring income / (costs)

				2016 £000		2015 £000
	Professional fees in respect of acquisitions			(249)	(25)
	Amendment to consideration payable in respect of Instem Clinical			690	(1,401)
	Restructuring costs in respect of Instem Clinical			(149)	-
	Amendment to contingent consideration post acquisition in respect of Samarind			327	-
				619	(1,426)

The professional fees relate to the acquisition of Samarind Limited on 27^th May 2016 and Notocord on 2^nd September 2016 (see notes 7 and 8)

During the year, the Group reached agreement with the previous owners of Instem Clinical resulting in the release of Instem from its obligation to pay the final consideration payments.

The contingent consideration in respect of Samarind Limited was estimated at its fair value at the date of acquisition.  This was re-measured at the reporting date and the estimation of the contingent consideration has reduced.

The 2015 non-recurring charge of £1.4m arose following the early agreement of the final deferred contingent consideration relating to the 2013 acquisition of Instem Clinical (formerly Logos Technologies). 

 

5. Finance costs

				2016 £000		2015 £000
	Bank overdrafts			32	86
	Foreign exchange losses			347	6
	Net interest on pension scheme			139	140
	Finance lease interest			8	4
	Unwinding discount on deferred consideration			120	36
				646	272

6. Earnings per share

Basic and fully diluted

Basic earnings per share are calculated by dividing the profit/ (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year.  Diluted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the share option schemes.  The dilutive impact of the share options is calculated by determining the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to the outstanding share options.

	2016			2015
	Profit after  tax £000	Weighted average number of shares '000	Earnings per share Pence	Profit/(loss) after  tax £000	Weighted average number of shares '000	Earnings per share Pence
Earnings per share - Basic	1,058	15,302	6.9	(428)	12,398	(3.5)
Potentially dilutive shares	-	324	-	-	-*	-
Earnings per share - Diluted	1,058	15,626	6.8	(428)	12,398	(3.5)

*Dilutive share options have been excluded from the calculation as in accordance with IAS 33, 'Earnings per share', as they are only included where the impact is dilutive.

Adjusted

Adjusted earnings per share is calculated after adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances included in finance income/(costs), non-recurring items and amortisation of intangibles on acquisitions. Diluted adjusted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the share option schemes. The dilutive impact of the share options is calculated by determining the number of shares that could have been acquired at fair value (determined as the average market share price of the Company's shares) based on the monetary value of the subscription rights attached to the outstanding share options.

 

	2016			2015
	Adjusted Profit after tax £000	Weighted average number of shares '000	Adjusted Earnings per share Pence	Adjusted Profit after  tax £000	Weighted average number of shares '000	Adjusted Earnings per share Pence
Earnings per share - Basic	1,752	15,302	11.5	1,644	12,398	13.3
Potentially dilutive shares	-	324	-	-	337	-
Earnings per share - Diluted	1,752	15,626	11.2	1,644	12,735	12.9

Reconciliation of reported profit/(loss) after tax to adjusted profit after tax:	2016 £'000	2015 £'000
Reported profit/(loss) after tax	1,058	(428)
Non-recurring (income)/costs	(619)	1,426
Amortisation of acquired intangibles	667	640
Foreign exchange differences on revaluation of inter-co balances	646	6
Adjusted profit after tax	1,752	1,644

7. Acquisition of Samarind Limited

Subsidiary acquired

		Company	Principal activity	Date of acquisition	Proportion of voting equity interests acquired %	Consideration £000
		Samarind Limited	Provider of Regulatory Information Management software and services to Life Science sector	27 May 2016	100	2,324

Samarind Limited was acquired to continue the expansion and development of the Group's capabilities in the Global Life Sciences sector.

 

Consideration

						£000
	Initial cash consideration (including £13k stamp duty)					1,313
	Initial share consideration					200
	Deferred consideration (27 May 2017) - To be settled in cash or shares					450
	Deferred contingent consideration (27 May 2017)- To be settled in cash or shares					350
	Deferred consideration (27 May 2018) - To be settled in cash or shares					200
						2,513
	Discounting of estimated future cashflows					(189)
	Fair value of consideration					2,324

The contingent consideration is based on certain performance related conditions in respect of the first twelve months.  The deferred contingent consideration in the table above is based on the forecast estimate that the performance related conditions will be fully met and the full consideration will be payable.

Acquisition related costs amounting to £66,000 have been excluded from the consideration transferred and have been recognised as an expense in the current year, within the 'Non-recurring costs' line item in the consolidated statement of comprehensive income.

Fair value of assets acquired and liabilities recognised at the date of acquisition

					Fair Value £000
		Non-Current Assets
		Intellectual property			1,047
		Customer relationships			921
		Property, plant and equipment			16
		Current Assets
		Trade and other receivables			104
		Cash and cash equivalents			697
		Current tax			119
		Current Liabilities
		Trade and other payables			(416)
		Deferred income			(404)
		Non-Current Liabilities
		Deferred tax on acquisition			(354)
		Fair value of identifiable net assets acquired			1,730

 

Goodwill arising on acquisition

						£000
		Consideration transferred				2,324
		Less: fair value of identifiable net assets acquired				(1,730)
		Goodwill arising on acquisition				594

The impact of the acquisition on the Group's assets and liabilities is set out above.  The fair value of the assets and liabilities may be adjusted for circumstances that are revealed within 12 months of the date of acquisition.  The value of goodwill arose on the acquisition of Samarind Limited because the premium paid by the Group reflected the expected benefit of synergies, revenue growth and future market development.  Samarind Limited was acquired to expand and enhance the Group's product and service offering within the Global Life Sciences operating segment.  These benefits have not been recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

Impact of acquisition on the results of the Group

Included in the profit for the year is a loss of £46,000 attributable to the additional business generated by Samarind Limited.  Revenue for the year includes £534,000 in respect of Samarind Limited.

Had this business combination been effected at 1 January 2016, the revenue of the Samarind from continuing operations would have been £915,000, and the profit for the year from continuing operations would have approximated break even.  The directors consider these numbers to represent an approximate measure of the performance of Samarind on an annualised basis and to provide a reference point for comparison in future years.

 

8. Acquisition of Notocord

Subsidiary acquired

		Company	Principal activity	Date of acquisition	Proportion of voting equity interests acquired %	Consideration £000
		Notocord Systems SA (including Notocord Inc.)	Provider of software into preclinical Safety Pharmacology sector	2 September 2016	100	2,482

Notocord was acquired to continue the expansion and development of the Group's capabilities in the preclinical Safety Pharmacology sector, which is adjacent to Instem's core Toxicology/Pathology sector.

Consideration

						£000
	Initial cash consideration - €2.3m (including €0.3m consideration in respect of acquired cash balances)					1,976
	Deferred contingent consideration (30 March 2017)					533
						2,509
	Discounting of estimated future cashflows					(27)
	Fair value of consideration					2,482

The contingent consideration is based on certain performance related conditions in respect of the years ending 31 December 2016 and 31 December 2017.  The maximum deferred contingent consideration which would be payable if all performance conditions were met would be £1.7m (€2m)

Acquisition related costs amounting to £183,000 have been excluded from the consideration transferred and have been recognised as an expense in the current year, within the 'Non-recurring costs' line item in the consolidated statement of comprehensive income.

 

Fair value of assets acquired and liabilities recognised at the date of acquisition

					Fair Value £000
		Non-Current Assets
		Intellectual property			1,258
		Customer relationships			996
		Property, plant and equipment			14
		Current Assets
		Trade and other receivables			148
		Cash and cash equivalents			245
		Current tax			(355)
		Current Liabilities
		Trade and other payables			(101)
		Deferred income			(232)
		Non-Current Liabilities
		Deferred tax on acquisition			(405)
		Fair value of identifiable net assets acquired			1,568

Goodwill arising on acquisition

						£000
		Consideration transferred				2,482
		Less: fair value of identifiable net assets acquired				(1,568)
		Goodwill arising on acquisition				914

The impact of the acquisition on the Group's assets and liabilities is set out above.  The fair value of the assets and liabilities may be adjusted for circumstances that are revealed within 12 months of the date of acquisition.  The value of goodwill arose on the acquisition of Notocord Systems because the premium paid by the Group reflects the expected benefit of synergies, revenue growth and future market development.  Notocord Systems was acquired to expand and enhance the Group's product and service offering within the Safety Pharmacology sector.  These benefits have not been recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

Impact of acquisition on the results of the Group

Included in the profit before tax for the year is a profit of £146,000 attributable to the additional business generated by Notocord.  Revenue for the year includes £531,000 in respect of Notocord.

Had this business combination been effected at 1 January 2016, the revenue of Notocord from continuing operations would have been in the region of £1.8m, and the profit for the year from continuing operations would have been in the region of £0.4m.  The directors consider these numbers to represent an approximate measure of the performance of Notocord on an annualised basis and to provide a reference point for comparison in future years.

 

9. Annual report and accounts

Copies of the Annual Report and Accounts will be posted to the Company's shareholders in due course and will be available, along with this announcement, on Instem's website at http://investors.instem.com.

 

END

 

 

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